Regulatory Practice Letter #14-13 | September 11, 2014 | KPMG | US
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Regulatory Practice Letter #14-13 | September 11, 2014

Regulatory Practice Letter #14-13 | September 11, 2014

Liquidity Coverage Ratio; Liquidity Risk Management Standards – Final Rule of U.S. Bank Regulators

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Executive Summary

The Federal Reserve Board (Federal Reserve), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the Agencies) have jointly released a final rule to implement in the United States (U.S.) a quantitative liquidity requirement for large, internationally active banking organizations. The final rule is substantially similar to the Agencies’ proposed rule published in November 2013 (please refer to Regulatory Practice Letter 13-20), though some adjustments (detailed below) have been made based on comments received. It becomes effective January 1, 2015; Compliance is subject to a phase-in scheduled.

In final form, the quantitative liquidity requirement imposes the expectation that, on a consolidated basis, a company’s “unencumbered high-quality liquid assets” (HQLAs) are at least equal to 100 percent of its “total net cash  outflows” over a prospective 30-calendar-day period. The ratio of the company’s liquid assets to its projected net cash outflows is referred to as its “liquidity coverage ratio” (LCR).

Companies covered by the final rule generally include, bank holding companies (BHCs), certain savings and loan holding companies (SLHCs), and depository institutions with $250 billion or more in total consolidated assets or more than $10 billion in on-balance sheet foreign exposure, and their consolidated depository institution subsidiaries with $10 billion or more in total consolidated assets (Covered Companies). BHCs and SLHCs without significant insurance or commercial operations that have $50 billion or more in total consolidated assets and are not otherwise companies covered by the LCR final rule, will be subject to a modified LCR requirement by the Federal Reserve (Modified LCR HCs).

The final rule becomes effective January 1, 2015 though transition schedules have been introduced to provide for compliance and reporting frequency:

  • Covered Companies with $700 billion or more in total consolidated assets or $10 trillion or more in assets under custody, and their consolidated depository institution subsidiaries with $10 billion or more in total consolidated assets must calculate the LCR on a monthly basis between January 1, 2015 and June 30, 2015, and on a daily basis thereafter.
  • All other Covered Companies must calculate the LCR on a monthly basis between January 1, 2015 and June 30, 2016, and on a daily basis thereafter.
  • Modified LCR HCs must calculate the Modified LCR on a monthly basis beginning January 1, 2016.
  • All Covered Companies must achieve at least: 80 percent of the minimum LCR in 2015, 90 percent of the minimum LCR in 2016, and 100 percent of the minimum LCR in 2017 and thereafter.
  • Modified LCR HCs must achieve at least 90 percent of the minimum Modified LCR in 2016, and 100 percent of the minimum Modified LCR in 2017 and thereafter.

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